Why Dave Ramsey Hates Bankruptcy

23 Sep Why Dave Ramsey Hates Bankruptcy

Most people have heard of syndicated talk show host Dave Ramsey, the debt-hating author of the Total Money Makeover. If you’ve listened to his show for more than five minutes you know that this guy is a die hard bankruptcy-hater.

But you also know that Dave filed for bankruptcy some years ago after going belly-up in real estate in the late 80’s. Made of real mess of his finances, Dave did.

So wait, why does he hate bankruptcy if he’s the beneficiary of the system? Seems two-faced, does it not?

Actually, no. Dave maintains – and rightly so – that bankruptcy is something to be recommended as often as divorce; though it may be the best option for some, it’s still something that should be avoid whenever possible.

Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and loss of a loved one. It’s a big deal, and Dave likes to try to work around problems that are on the “big deal” list.

It isn’t that he believes bankruptcy to be immoral, just avoidable for most people. He advocates selling off the excess junk, taking on two jobs, and doing everything short of selling your family members to pay off debt.

There’s some amount of “horse sense” in that sentiment, the notion that by getting rid of the stuff you shouldn’t have bought in the first place you may be able to bring yourself closer to zero debt. But the reality is that things depreciate rapidly, and most people who need to file for bankruptcy aren’t doing so because of excessive compulsion.

Dave Ramsey was an exception to the rule – the hard-charging, highly-leveraged real estate speculator who lost his shirt in a spectacular crash. He may have been able to avoid his own filing by divesting himself of his real estate holdings, but that doesn’t hold true for the average bankruptcy filer.

Most people file for bankruptcy after spending years living on credit cards, and doing so because they were paying their credit card debts and didn’t have any cash left on hand to pay for essentials like food and clothing. They fell into deep medical debt, faced foreclosure and job losses, and the list goes on and on. They are not Dave Ramsey.

So when you listen to Dave pound the table about avoiding bankruptcy, consider this – you’re listening to a man who went through bankruptcy, came out the other end and lived to tell the tale, and is now worth millions and millions of dollars. Could he have done all of that if he had all that debt hanging around his neck like a hangman’s noose? Probably not.

And to Dave, I say this – congratulations! You availed yourself of the law, got a fresh financial start, and now thrive. Just like any smart person who comes out of bankruptcy, you used it as a way to plan for a better future.

Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

2 Comments

Jim Coutinho

Posted at 12:21h, 07 June

Jay,

As a consumer bankruptcy attorney and someone who has worked the Ramsey plan to pay off over $100k in student loans, I took interest in your article. I think you have it right in the beginning: bankruptcy should be a last-resort option. But in the end, I think you are missing the point of most of Dave’s teachings regarding bankruptcy.

For consumer cases, bankruptcy is nothing but a symptom of an individual’s larger problems. Filing can clear the debt and give people a fresh start, but it can never solve the underlying problems for them: an income crisis, overspending, lack of financial education and communication, etc. Filing bankruptcy is necessary in some cases, especially when creditors force debtors into it or the debt is so outlandish that it would be impossible to pay back. But that is not always the case, and the filing alone is never sufficient to help people without other behavioral change.

My favorite line that Dave says is that “a bankruptcy lawyer telling you that you are bankrupt is like a dog telling you that it’s hungry.” As a breed, we bankruptcy lawyers are too quick to adopt bankruptcy as the option for clients, and then to leave clients after a meeting of creditors with a “Good luck” and no further contact. I know why that is from a business perspective, but it is not the best way to helping anyone. The reason bankruptcy attorneys get away with it is because (1) people don’t know better as they rely on our professional opinion; and (2) many people have lost all hope by the time they come to us.

The benefit of what Ramsey teaches is just that: he gives hope to people who need it. There is hope in avoiding bankruptcy. There is hope in not making the same mistakes twice. There is hope for retirement. There is hope for teaching your children about money. That’s why I was extremely pleased to see that Dave now offers a Debtor Education course. I send all of my clients to it, and try to convince them to take the full Financial Peace University class. Then, even if I don’t have the ability from a business perspective to financially counsel my clients out of their real problems, I can at least trust that they will get some of the financial literacy that they desperately need rather than sitting in a useless and boring class.

You are correct that Ramsey availed himself of the law and has thrived since. But you are missing the purpose of what he does: he fills in those financial literacy gaps where parents, schools, and professionals have left so many poorly lacking. He provides hope in many hopeless situations. He provides the advice and perspective that most bankruptcy attorneys do not. I for one welcome him talking frankly about finances and about bankruptcy. Having gone through it himself, he is the best to do it, and one of the few who actually addresses these issues. Most of us bankruptcy attorneys sure don’t. There’s no one better than Dave to help these people before bankruptcy and after discharge.

So when you listen to Dave pound the table about avoiding bankruptcy, consider this — are we doing all we can to advise our clients correctly, or is Dave filling in the voids we’ve left?

It was interesting to read Jay’s blog and Jim’s response on the Dave Ramsey attitude towards bankruptcy. I think it appropriate to chime in.

I have know Dave Ramsey for about 20 years. His first radio program was broadcast from a bankrupt radio station and I was involved in trying to cobble together a purchase of the station, so I listened to the station and heard what he was saying. What he said made sense, particularly to a bankruptcy trustee. His perspective, coming from a personal bankruptcy, was eye opening because too many of us in the bankruptcy world seem to forget that filing a bankruptcy is a traumatic, gut wrenching experience that is a public admission of personal failure. Granted, many people today don’t see it in quite the same way as Balzac or Daniel Defoe, but for most it is and should be a very decision.

The analogy to the divorce issue is apt. You would not expect a preacher or marriage counselor to openly and publicly say that the best way to deal with problems in a marriage is to get a divorce. That same counselor or preacher may privately advise an individual to pursue a divorce if that were the best way to deal with a difficult marriage. It would not be the first answer but it may be the best answer. I see that as the way Dave Ramsey looks at bankruptcy.

For example, when the Ramsey group trains its local counselors, they present a section on bankruptcy, taught by a bankruptcy professional. They are not afraid or opposed to giving their counselors the tools they need to help folks.

Early in the program, I personally attended FPU. As a trustee interested in debtor education, I was interested in the focus on behavioral modification that FPU provides. I was not disappointed. I have suggested to many debtors (the ones that are interested in turning their lives around) that they look at participating in the full, 13 week FPU course. I have supported the payment of the tuition for FPU in a chapter 13 plan as an administrative expense. I have provided FPU to all of my employees at the workplace so they can have a personal connection with what we are asking our debtors to do. That program was very successful and I strongly recommend a debtors’ attorney or a trustee provided FPU to their own staff.

Jim correctly notes that dealing with lots of debt by filing a bankruptcy is largely treating the symptom rather than the disease. Only with a focus on changing behavior – looking at increasing income, controlling expenses and avoiding debt – can the fresh start stick. The FPU program works at the cause of problems, not just trying to get to a short term result. If more folks going through the bankruptcy system followed the Ramsey plan, there would be fewer people coming back.

Don’t worry, though. Good Debt Relief Agents know that as long as they are sending plastic cards through the mail or we do not have a decent way to cover medical care, there will always be plenty of people who will need the assistance of a bankruptcy. But we should remember that to a hammer every problem is a nail. We should not be hammers. Not everyone needs a bankruptcy and those who do should be given the tools to really get a fresh start.